Buried beneath the typical discussion of production declines, permit delays, and shareholder returns in California Resources Corporation's (CRC) recent earnings call lies a tantalizing hint of a future far grander than simply pumping oil. While analysts focused on the immediate challenges and opportunities of CRC's traditional business, a subtle shift in the company's carbon capture strategy suggests a potential pivot towards becoming a dominant force in the burgeoning green hydrogen market.

CRC, through its Carbon TerraVault (CTV) platform, has aggressively pursued carbon capture and storage (CCS), racking up five CO2 management agreements (CDMAs). These agreements, representing 16% of their planned storage capacity, primarily focus on greenfield projects, co-located with their storage reservoirs. This strategy makes sense in the short term, offering faster project development and lower capital requirements. However, a closer look reveals a fascinating development with the Lone Cypress blue hydrogen project.

Initially, the CDMA with Lone Cypress reserved storage capacity for 100,000 metric tons of CO2 per year. CRC's Q2 2023 earnings call disclosed a doubling of that reserved capacity to 205,000 metric tons per year. This expansion indicates a significant scaling up of the Lone Cypress blue hydrogen project, a move that might seem counterintuitive given the greenfield focus emphasized throughout the call.

Here's where the intrigue intensifies. While "blue" hydrogen, produced from natural gas with CCS, aligns with CRC's current strengths, the company also possesses the key ingredients for "green" hydrogen production: abundant renewable energy potential through solar power and vast land holdings for electrolyzer installations.

Could Lone Cypress Be a Stepping Stone to Green Hydrogen Dominance?

The hypothesis is compelling. Consider this: California boasts ambitious renewable energy targets, aiming for 100% carbon-free electricity by 2045. CRC, with its extensive California footprint, is uniquely positioned to leverage this surge in renewable power. Their Elk Hills Net Zero Industrial Park, already planned for blue hydrogen and other greenfield projects, could readily accommodate large-scale electrolyzer installations powered by solar farms.

Furthermore, CRC's existing midstream infrastructure and expertise in managing large-scale energy projects provide a substantial advantage in transporting and distributing green hydrogen to end users.

"The Numbers Tell a Story: California's demand for hydrogen is projected to skyrocket in the coming decades, driven by decarbonization goals in transportation, industry, and power generation. The state's Low Carbon Fuel Standard (LCFS) provides substantial economic incentives for low-carbon fuels, making green hydrogen a particularly attractive option. CRC, by transitioning Lone Cypress from blue to green hydrogen, could tap into this massive market opportunity while leveraging its existing expertise and infrastructure."

Projected Growth in CO2 Management Agreements

The following chart illustrates the potential growth trajectory of CRC's CDMA portfolio, based on their stated target of 5 million tons per year by 2027.

While the earnings call didn't explicitly mention a shift towards green hydrogen, the Lone Cypress capacity expansion raises a crucial question: is CRC quietly positioning itself to become a green hydrogen powerhouse? The evidence suggests this may be the case.

Of course, challenges remain. Building out the necessary electrolyzer capacity and securing large-scale renewable power contracts will require significant investment and careful planning. Competition from other green hydrogen players, both established and emerging, will be fierce.

However, CRC possesses a unique combination of assets and capabilities, making them a formidable contender in the race to dominate California's green hydrogen market. The quiet expansion of Lone Cypress might just be the first hint of a strategic shift with monumental implications for the company's future.

"Fun Fact: Green hydrogen, produced using renewable energy sources like solar and wind, is considered a truly "clean" fuel, as it emits only water vapor when used. This makes it a highly desirable energy carrier for a future striving for net-zero emissions."